Bart Chilton: Let's Get Over OPEC
For many decades, with the largest oil reserves and a majority of global oil spigots, and acting as a mostly cohesive cartel, the dominant player has, obviously, been OPEC (the Organization of the Petroleum Exporting Countries).The rest of the world, as countless complainers have moaned, has been held hostage to their price whims with resultant impacts on national economies. However, the sands are shifting as recent “Doha days” have exemplified. OPEC is neither as cohesive nor as powerful as they were back in the day. Consequently, it’s time to refocus our attention on U.S. energy independence and heed a line from an old Eagles song: “All this whinin' and cryin' and pitchin' a fit…Get over it, get over it!” Let’s get over OPEC.
The Baseline—The U.S., Saudi Arabia and Russia are the top oil producers, each with roughly 11-13% of production. Global demand for oil is roughly 93 million barrels per day, yet the world currently produces around 94 million barrels. Supply has exceeded stagnant demand for two years as oil containers around the planet are teeming to the tops, including tankers of “liquid storage” on the high seas. The oversupply has, naturally, reduced prices. Just over two months ago, on February 17th, West Texas Intermediate (WTI) oil bottomed out at $26 a barrel—its lowest price point since 2003. The day before, Saudi Arabia and Russia agreed to freeze output at current levels. Their objective: freeze production, reduce supply, raise oil prices and profits. Importantly, they also signaled a desire to encourage other oil producing nations to follow suit. That signal moved markets, buoying prices to around $40 a barrel for the past two months.
Doha Days—To follow through on the Saudi-Russia strategy, after a few fits and starts at setting up meetings, oil ministers from the two nations along with OPEC members, met this past weekend in Doha, Qatar to strike a deal. The problemo, however, is that OPEC member Iran didn’t attend. United Nation sanctions on Iran, in place from 2012-2015, due to their nuclear development program had the impact of reducing Iranian oil production from a high of roughly 4 million barrels a day (about 5% of global production) to 500,000 barrels per day. After sanctions were lifted, Iran sought to—and they have—ramped up production. The nation has let it be unequivocally known that they have zippity desire to freeze production at anything other than the robust levels achieved during their glory days. That being unacceptable to the Saudis, they, ironically, ended up killing any Doha deal. With no agreement, it’s apparent the OPEC clique is currently cracked. The next opportunity for such discussions and potentially coalescing cohesion will be at the June 2nd OPEC meeting in Vienna.
Reduced Influence—OPEC, which in the past had produced over 60% of the global oil, currently produces around 40%. The group, which includes many member countries outside of the Middle East (namely Venezuela—at 5% of production—and others in South America, plus some in Africa), doesn’t have the historic influential impact they had before. In the days of yore, the 1973 oil embargo, OPEC actions resulted in enormous economic damage to the United States and several other nations. The reduced OPEC global production percentage is due, in large part, to production increases elsewhere, indulging the U.S. and Russia—plus China, Canada and Mexico with about 4.5%, 4%, and 3% of global production, respectively.
Bottom Line Time—While OPEC is still a significant and serious contributor to prices, their cohesion and influence has been reduced. Rather than wringing our hands at what they may or may not do, going nuts over every nuance, we should focus on what we in the U.S. do best: allow our free market flag to fly and flourish. Focus on ensuring prices will continue to be discovered fairly and fundamentally-based upon supply and demand. Focus on being able to continue to develop greater energy independence—even as low prices make that a rougher and tougher task. And, importantly, we should appreciate that energy costs impact real people, many with honest businesses outside of the energy sector which have benefitted from lower energy costs. Last year alone, U.S. drivers saved $1 billion—$550 per driver—due to reduced oil prices. We have a lot to do. Let’s focus on the future. Get to work, and get over OPEC.
(About the Author: Commissioner Bart Chilton served at the US Commodity Futures Trading Commission from 2007-2014 and is currently a Senior Policy Advisor at the global law firm DLA Piper LLP (US). He is the author of Ponzimonium: How Scam Artists Are Ripping Off America and can be reached at bartchilton@bartchilton.com.)